Modeling the Value of an Internet Exchange Point

Abstract

This paper is about estimating the value of an Internet Exchange Point to the community it serves.

The Financial Value of an Internet Exchange Point

Definition: The Financial Value of an Internet Exchange is a measure of the financial value derived from an IX by its participants. It can be estimated by subtracting the collective cost of participation from the collective benefits of participation (sending that peering traffic over a transit service instead).

Let’s start the analysis by making a three simplifying assumptions.

First, the value an Internet Exchange point provides is facilitating the peering of traffic between participants. There are at least two dimensions to the value of peering: the value of the traffic volume peered, and the routes announced at the IX. We will only focus here on valuing the volume of traffic in this article; the routes announced deserves its own analysis.

Second, it is important to note that several large IXes have both public peering fabrics and private peering services. Private peering is traffic directly exchanged between two parties, often over a physical piece of fiber or a virtual private service. Being able to do both public and private peering represents a significant value of the IX, but unfortunately the traffic peered privately can’t be factored into the analysis since there is no visibility into the amount of traffic exchanged privately. For this reason, we will have to start out with the simplifying assumption that the value of the IX is proportional only to the value of public peering. (The LINX has migrated some large traffic flows onto private peering so as a result this analysis will consequently understate their value.)

Third, let’s assume that the alternative to peering is buying transit, so the value of the IX can be estimated to be

MarketTransitPrice * VolumeOfTrafficPeered

for free at the IX.

Under these assumptions, if the IX went away, the community using the IX would have to exchange that traffic with their transit provider at a metered rate. We further assume that the IX peak measure approximates the 95th percentile measure upon which transit is billed.

We say ‘peered away for free’, but public peering is not completely free. The cost of public peering includes some monthly recurring costs for each participant at the IX. If we subtract these costs from the value derived, we can estimate the value of the IX to the population:

Internet Exchanges are a special case of this effect; the value of an Exchange Point is not the number of participants but a slightly more complex calculation including the number and uniqueness of the routes and volume of traffic peered. Since the value of the IX to an ISP is proportional to the amount of traffic the ISP can exchange in peering relationships at the IX, the value of the IX to the peering population follows the network externality graph as shown below.

On the Y-axis we see the value of the Internet Exchange Point. On the X-axis we see the independent variable that causes the value of the IX to increase; we will use the number of participants for now; as more participants connect to the exchange for peering, the more value an NSP could derive from peering at the IX

All Internet Exchange Points go through the following growth curve. They start out with zero or a few founding ISP members, and face the challenge of attracting additional peers into a building where there are not many peers to peer with. This is the "startup hump", and solutions to this problem were shared with the author in "The Art of Peering: The IX Playbook".

Once the IX reaches critical mass, where the value of participation exceeds the cost of participation, the a well positioned IX experiences exponential growth.

A Note about these calculations

Note: Some variables in this equation may be difficult to obtain.

Many Internet Exchange Points make the aggregate peering traffic volume available to the public, but some do not.

Further, private peering exchanges often utilize cross connects making it impossible to assess the total amount of traffic traversing their private exchange. This formula is therefore more accurately described as the value of a Public Internet Exchange fabric to the participants. To calculate the value of the Internet exchange, one would need to include not only the public peering fabric, but also the benefits of private peering and buying/selling transit in an environment where interconnection cross connects is less expensive than with local loops.

Now we can estimate the value of the Internet Exchange Point, or at least the value of the public peering that we can measure at the Internet Exchange Point.

Calculating the Value of an Internet Exchange

Definition: The Financial Value of an Internet Exchange is a measure of the financial value derived from an IX by its participants. It can be estimated by subtracting the collective cost of participation from the collective benefits of participation (sending that peering traffic over a transit service instead).

Below is an estimation of the value of participation in public peering at various IXes, based on publicly available data in late 2009. It shows that the massive amount of traffic that is being exchanged in peering relationships is substantially more cost effective than if that traffic traversed their upstream transit provider.

Under these assumptions, the model allows us to make the following statements about the DECIX for example:

On average, the DECIX returns approximately 2.1 times more value than it costs to its membership. The 275 members get the benefit of publicly peering their 550 Gbps for free -- traffic that would otherwise be sent to transit providers at today's market price of $5.00 per Mbps, or $2,750,000 per month. The cost to the membership for public peering on average is $1,287,00 per month for their 10G ports and membership fees. The surplus value of the DECIX (the amount of value that exceeds the cost) is therefore estimated to be $1,463,000 per month to its population. That is, if the DECIX were to disappear, the population would be $1,463,000 worse off.

Simplifying Assumptions in the Modeling

Simplifying Assumptions and observations surrounding the model

The model assumes that the next best alternative to peering at the IX is transit. However, a somewhat common next best alternative to peering with the peers at this IX, is hauling that traffic to a different IX and peering that traffic away there. This alternative peering solution may be less expensive than the transit alternative cited. The model may be over or under estimating the value of the IX.

We are ignoring the cost of transport (circuit) into the public peering fabric. This cost varies widely, from transoceanic builds to transcontinental circuit extensions to in building cross connects.

The cost of peering side of the equation is ignoring equipment costs. The equipment required for peering varies widely and may represent a significant capital and operational expense. With varying amortization schedules and different operational models, this is more difficult but possible to include in a slightly more complex model.

We are assuming that the IX member count reflects public peers at the IX. Some members may not in fact not be attached or peering on the public fabric (yet), and some may use the fabric only for testing peering volume or as a failover should another IX fail. The formula therefore underestimates the value of the IX to the population actually using the public fabric.

We are ignoring the value of private peering, and the value of colocation with private peers. Some IXes provide additional value by supporting private peering as well as public, so the model underestimates the value of the IX.

We are ignoring the marketplace effects (for example, the ability to sell services at the IX, and negotiating with many suppliers in an open market), so this model underestimates the value of the IX.

We are assuming that the cost of the peering fabric includes only the public peering port and any association fees. Specifically, we are ignoring colocation expenses, install fees, etc. The model may be under estimating the cost of peering and therefore over estimating the value.

We are assuming that traffic volumes are measuring free peering across the exchange – there may in fact be some paid peering. The traffic may not be ‘free’ peering so the model overstates the value of the IX. The model may be underestimating the value for the recipient of the paid peering revenue, and over estimating the peering value for the traffic that is not actually free.

We are assuming that the peak measure in+out, which is what the IXes generally report, approximates the 95th percentile that both sides of a peering relationship are saving. There are arguments that this overestimates the value of peering, since traffic in one direction is generally ‘free’, and the other is the traffic the peers would otherwise pay transit fees for. Others argue that both sides, sending and receiving are saving money in both directions to some degree, so the value of peering is actually closer to double that.

By averaging traffic volumes and costs, we are implicitly assuming that all ISPs peer the same amount of traffic. In reality, there will be some big winners, and some who won’t receive the ‘average’ peering benefit, so the model may be overestimating the value of the IX for the average peer.

We are ignoring non-recurring fees (such as install fees).

We are ignoring price discounts on second and subsequent ports. Criticism of the model for the Value of an Internet Exchange. The model is generalizing: working with averages, flattening the vast differences between networks, the alternatives available, and setting aside the many other considerations that make peering different for different peers. The model ignores the value of unique routes, those only heard at this IX, which are inherently more valuable than those also available at alternative IXes, especially those IXes that are topologically close to the IX considered. The ISPs that represent a large proportion of the traffic volume may not peer with the ‘average’ participant. Acknowledgements Thanks to Chris Park (EasyNet), Randy Epstein, Richard Steenbergen (nLayer), Joe Provo (ITA) and a handful of anonymous contributors for their critiques, corrections, and insights.

Related Documents

Who is William B. Norton?

Executive Director, DrPeering International

Chief Strategy Officer, International Internet Exchange (IIX)

WIlliam B. Norton is the author of The Internet Peering Playbook: Connecting to the Core of the Internet, a highly sought after public speaker, and an international recognized expert on Internet Peering. He is currently employed as the Chief Strategy Officer and VP of Business Development for IIX, a peering solutions provider. He also maintains his position as Executive Director for DrPeering.net, a leading Internet Peering portal. With over twenty years of experience in the Internet operations arena, Mr. Norton focuses his attention on sharing his knowledge with the broader community in the form of presentations, Internet white papers, and most recently, in book form.

From 1998-2008, Mr. Norton’s title was Co-Founder and Chief Technical Liaison for Equinix, a global Internet data center and colocation provider. From startup to IPO and until 2008 when the market cap for Equinix was $3.6B, Mr. Norton spent 90% of his time working closely with the peering coordinator community. As an established thought leader, his focus was on building a critical mass of carriers, ISPs and content providers. At the same time, he documented the core values that Internet Peering provides, specifically, the Peering Break-Even Point and Estimating the Value of an Internet Exchange.

To this end, he created the white paper process, identifying interesting and important Internet Peering operations topics, and documenting what he learned from the peering community. He published and presented his research white papers in over 100 international operations and research forums. These activities helped establish the relationships necessary to attract the set of Tier 1 ISPs, Tier 2 ISPs, Cable Companies, and Content Providers necessary for a healthy Internet Exchange Point ecosystem.

Mr. Norton developed the first business plan for the North American Network Operator's Group (NANOG), the Operations forum for the North American Internet. He was chair of NANOG from May 1995 to June 1998 and was elected to the first NANOG Steering Committee post-NANOG revolution.

About the White Papers...

The Peering White Papers are based on conversations with hundreds of Peering Coordinators and have gone through a validation process involving walking through the papers with hundreds of Peering Coordinators in public and private sessions.

While the price points cited in these papers are volatile and therefore out-of-date almost immediately, the definitions, the concepts and the logic remains valid.